Agricultural Credit Conditions Survey

Lenders optimistic following a strong fourth quarter

Agricultural Credit Conditions Survey

Agricultural financial conditions were strong during the fourth quarter
throughout the district, according to the Minneapolis Fed’s fourth
quarter agricultural credit conditions survey. Loan repayment and farm
income have increased. Corn yields were robust, while soybean yields have
suffered due to drought. Farmers have begun to rebound from previous declines
in dairy prices. The outlook for 2004 is promising, as lenders expect
an increase in farm income and loan demand. Cattle prices through 2003
led to higher incomes, but the effects of mad cow disease are expected
to play out in 2004. As one South Dakota lender commented, “…
concern has recently surfaced on the focus of BSE and loss of our livestock
export markets.” Overall, the outlook across the district is positive.

Farm income, farm household spending and capital investment

An increase in farm income during the fourth quarter was reported by
59 percent of lenders, while a third noted no change. Only 8 percent reported
below-normal levels of income, the lowest figure in recent survey history
(see chart). “Recent trends in both meat and grains pushed up expected
income and loan repayments,” commented one Minnesota lender. Several
lenders throughout the district shared these sentiments, although many
expressed concerns about the effects of mad cow disease on livestock prices.
Lenders in Wisconsin and Montana reported greater decreases in farm incomes,
20 percent and 18 percent, respectively, than their neighbors.

Source: Federal Reserve Bank of Minneapolis

Household spending in the district was strong: One-third of the surveyed
lenders reported an increase and 61 percent noted no change in the fourth
quarter. These feelings were echoed in their outlook for the upcoming
quarter, as 94 percent of lenders felt that household spending will remain
constant or increase.

Capital spending also stayed fairly stable with only 16 percent of lenders
reporting a decrease. One lender in Montana wrote, “Capital spending
was up due to changes in tax laws that allow more depreciation. Capital
spending was also influenced by [an] increase in income as producers had
put off making some purchases over the last few years of lower income.”
The outlook for capital spending is generally positive, although 33 percent
of Wisconsin lenders and 23 percent of South Dakota lenders expect a decrease
in the upcoming quarter.

Loan repayment, renewals and limits

Loan repayments across the district were stable or increased during the
fourth quarter. Only 9 percent of lenders districtwide reported a decrease
in loan repayments. The demand for renewals or extensions remained constant,
according to 74 percent of the surveyed lenders, while 12 percent reported
an increase. One lender from South Dakota wrote, “… 2004 should
be one of the best renewal seasons in years.” Most of their current
customers will qualify for new operating credit this spring as only 5
percent of 2003 customers will not qualify for operating loans.

There is a limit to the amount that agricultural customers can borrow.
District respondents reported that 23 percent of their farm and ranch
customers were at their loan limit—from a high of 33 percent in
Montana down to 18 percent in South Dakota.

Demand for loans, required collateral and interest rates

Loan demand through the fourth quarter remained steady, as 62 percent
of lenders reported no change and 20 percent noted an increase. Collateral
requirements were also steady; only 8 percent of lenders reported an increase
and none, a decrease.

“Lower interest rates have been the salvation for this region,”
wrote a lender from South Dakota. Fourth quarter average interest rates
for fixed and variable loans fell slightly from the third quarter of 2003,
resulting in some of the lowest rates last year. Most lenders reported
sufficient availability of funds, but 10 percent of respondents from Wisconsin
noted a decrease in their fund availability.

Land values

Land values continued to increase. “Nonfarmer, nonresident land
purchaser[s] have put upward pressure on our land values,” wrote
one lender from North Dakota. The rise in land values does not bode well
for some farmers: “Land rental rates appear to be following this
trend as well. This will make it increasingly difficult for existing or
beginning farmers to be able to afford expansion or startup,” observed
a lender from South Dakota. District ranchland and farmland prices rose
an average of 25 percent and 16 percent, respectively, from fourth quarter
2002.

Outlook

Lenders feel optimistic about first quarter 2004, as most expect farm
income, household and capital spending, and loan repayment and demand
to either increase or remain level with the fourth quarter in 2003. However,
some lenders expressed reservations regarding the effects of mad cow disease
on cattle prices and thus overall income and financial conditions, especially
in areas where the cattle industry constitutes the majority of lenders’
portfolios.